International
Labour Organization

Bureau for
Workers' Activities

National Framework for Globalization

Contents

• Introduction
• Privatization
  • Motives
  • Methods
    • Direct Sale of Entire Company to Public
    • Partial Sale of Company to Public
    • Sale of Company to Another Company or Consortiums
    • Deregulation
    • Removal of Subsidies
    • Voucher Schemes
  • Country and Regional Developments
    • Industrialized countries
    • Developing countries
      • Value of privatization revenues
      • Relation of privatization revenues to FDI
  • Sectoral developments
    • Overview
    • Energy
    • Telecommunications
• Special Economic Zones
  • Differences between the zones
  • Some data on the zones
  • Some observations on outward processing

Introduction

Liberalization within a national framework involves a large variety of legislative issues. Capital account liberalization, interest rates set by the market, and flexible exchange regimes create the framework for the globalization of financial transactions. Foreign investments (both foreign direct investment - FDI - and portfolio investment) flow in and out in almost all countries. Interest rate liberalization is proceeding rapidly, and flexible exchange rates have become dominant in developing countries as well. (For a summary of economic changes and the problems and opportunities of financial liberalization, see International Monetary Fund (IMF), Capital Account Liberalization (http://www.imf.org) and Finance&Development, Interest Rates - An Approach to Liberalization, and IMF Survey November 17, 1997 on Currency Crises)

When capital is free to move, it has to make a choice where to settle down. Liberalization of national legislation is performed in order to encourage the presence of multinational business. Industries previously closed to FDI have been opened, state property has been privatized, procedures (such as administrative approvals and customs procedures) have been simplified, and incentives and concessions have been introduced. In 1996, there were 98 liberalizing changes made in the regulatory frameworks for FDI in 65 countries. This is comparable to the number of changes recorded in each of the previous three years.

However, the number of changes in the direction of greater economic control in 1996 was much higher than in 1995. Out of 114 total legislative changes, 16 were in the direction of more control. The major legislative activity in 1996 involved the introduction of more incentives (34%), more liberal operating conditions (25%), and more promotional measures other than incentives (8%).

Privatization and special economic zones are major contributors to globalization. The privatization of state-owned assets has opened up enormous investment opportunities for multinational corporations. Although large-scale privatization has been occurring in developed countries since the early 1980s, there remains much state property to be privatized. This is especially true of the energy and telecommunications industries, which are the two largest sources of privatization revenues. In 1996, privatization revenues increased to $88 billion, from $69 billion in 1995. While industrialized countries still account for the majority of global privatization revenues, the share of FDI in privatization revenues is much larger in developing countries. In many developing countries, everything that has been privatized has been purchased by foreigners.

According to the United Nations Conference on Trade and Development (UNCTAD), numerous special economic zones and special regional packages were introduced in the years leading up to 1996, both in developed and developing countries. Unfortunately, there are no up-to-date global or regional quantitative data on special economic zones, the characteristics of which vary greatly. Some are dedicated to the preferential treatment of exports only (export processing zones, or EPZs). Others are for preferential treatment of both exports and imports (free trade zones, or FTZs), while a third category is for preferential treatment of imports only (foreign access zones, or FAZs).

Privatization

Motives

Privatization represents a reversal of the process of nationalization begun early in this century. In most communist countries, a wave of nationalizations ensued shortly after communist governments assumed power in the aftermath of World War I and World War II. In Western Europe, the nationalization process stretched over several decades, but essentially took hold in the 1930s. At the time, European governments of divergent political views were largely in agreement over the benefits of a strong state role in their domestic economies. (Energy Information Administration (EIA), Privatization and the Globalization of Energy Markets)

In part, the roots of privatization stem from the recent decline of socialism as well as from the growing conviction that free enterprise advances the wealth of nations better than nationalized industries and planned economies. Privatization has also been driven by the increasing globalization of the world economy. Several decades of rapid growth in international trade and investment have made competitiveness in international trade an essential factor in the ability to create jobs, raise real wages, and generate wealth.

Although privatization efforts differ substantially from country to country, there is a strong common economic rationale underlying the various decisions to privatize state resources. In general, the privatization of state-owned industries has been performed to achieve one or more of several objectives. These include: (1) raising revenue for the state; (2) raising investment capital for the industry or company being privatized; (3) reducing the role of government in the economy; (4) promoting wider share ownership; (5) increasing efficiency; (6) introducing greater competition; and (7) exposing firms to market discipline. For many countries, privatization has become the only effective method of raising investment capital on favourable terms. High levels of past public-sector borrowing have saddled many countries with large levels of debt. As a result, these countries have had little recourse but to sell state assets to reduce their debt, generate revenue, and raise investment capital. (EIA, Privatization and the Globalization of Energy Markets)

Methods

National governments have pursued various methods of privatization - the motivations for which are as various as the methods themselves. (Note: The following section is taken from the EIA report Privatization and the Globalization of Energy Markets.)

Direct Sale of Entire Company to Public

In some instances, countries have chosen to transfer ownership of industries or companies swiftly and completely. Argentina, the United Kingdom, Chile, and New Zealand have generally undertaken some of the most ambitious privatization efforts by auctioning off companies directly to the public - thereby letting the market determine the value of these companies through the bidding process. In some cases, (for example, the privatization of British Energy) the auctioning off of a company revealed an enormous divergence between the newly-discovered market value and the previous book value of the company as recognized by the government.

Partial Sale of Company to Public

Most privatizations have been gradual. For example, in the case of British Petroleum, partial government ownership dates back to 1914. In 1977, the government reduced its ownership share from 66% to 51%, and then to 46% in 1979, 31% in 1983, under 2% in 1987, and finally to zero in 1995. In addition, governments have often sold shares of a state-owned firm while retaining a portion of the company (a "golden share"), thereby maintaining a limited degree of control over the company. This practice has become widespread, both in OECD and non-OECD countries.

Sale of Company to Another Company or Consortiums

Often governments have chosen to sell state-owned utilities directly to companies - either foreign or domestic. For example, when Bolivia privatized the state electricity monopoly Ende, it was broken into three electricity generation companies and directly sold off to foreign (primarily US) utility companies.

Deregulation

Another form of privatization involves deregulation. Deregulation has been the most prevalent form of energy privatization in the United States, most recently in natural gas transportation and electric power generation and transportation. Electric power generation, transmission, and distribution has long been held up as an example of a "natural monopoly". However, as the notion of the natural monopoly has evolved, so has the justification for maintaining government-controlled utilities.

Removal of Subsidies

The removal of a subsidy can also be viewed as a form of privatization. The removal of subsidies for European coal operations, for example, precipitated the constriction of Europe's coal mining industry and encouraged a large shift in coal investment from European mines to mines in the United States, Australia, and Latin America.

Voucher Schemes

Another aspect of privatization concerns the methods by which public ownership is achieved. In many formerly communist countries, voucher schemes have been adopted whereby ownership in an industry is simply transferred to the general public with no cash exchanged. A lack of developed equity markets may have encouraged voucher schemes. After the initial distribution of vouchers, individuals may buy or sell them, thereby encouraging the creation of stock exchanges. In some instances, the transfer of ownership has been implemented with labour and management being allotted favoured shares.

Country and Regional Developments

In 1996, worldwide privatization revenues amounted to an all-time high of $88 billion, with a record-breaking $68 billion raised from privatization in OECD (Organisation for Economic Co-operation and Development) countries. In non-OECD countries, privatization revenues declined from $25 billion in 1995 to $19 billion 1996.

1997 global privatization revenues were predicted to reach $100 billion. Privatizations in OECD countries accounted for an estimated $70 billion of this figure, while privatizations in non-OECD countries were expected to be approximately $30 billion. (OECD, Financial Market Trends, No.66, March 1997)

Industrialized countries

Among OECD countries, the majority of privatizations have taken place in European Union countries in the 1990s. The share of the 15 EU members in total revenues raised in OECD countries was 55-63% annually over the period 1990-1997 (except for 1992, when it was only 28%). Looking at OECD countries outside Europe, the Australian Commonwealth and its state governments have in recent years embarked on impressive privatization programmes. The largest single privatization in 1996 was the sale of the remaining state participation in the Commonwealth Bank of Australia ($4.1 billion). In 1996, the Japanese government re-launched its privatization programme, raising $6.4 billion. (See table on country breakdown of global amount raised from privatization)

Among industrialized countries, the United Kingdom is the leading country in privatization. Prior to 1979, the UK possessed one of the largest public enterprise sectors in Europe. Since then, successive Conservative governments have undertaken an extensive privatization programme. Between 1979 and 1995, over £50 billion in state assets (excluding proceeds from the sale of government-owned housing) have been sold to the private sector, and the share of employment accounted for by publicly-owned industries has fallen from 7.2% to under 2%. (The British Council, The Evolution and Performance of UK Privatization)

British Aerospace was the first large company to be auctioned off in 1981, followed by Cable & Wireless (1981) and British Telecommunications (1984). The privatization of British Gas (1986), British Airways (1987), British Steel (1988), and British water utilities (1989) followed soon afterwards. More recently, British Coal was privatized in 1995, and British Rail and British Energy in 1996. The Railtrack offering raised £1.9 billion, and British Energy £1.5 billion from the market.

Among European OECD countries, by far the largest transaction in 1996 was the initial public offering of Deutsche Telekom, at DM 20.1 billion. The second-largest privatization transaction was a secondary offering in the Italian oil and gas company ENI, which raised L 8.87 trillion. After the offering, the state's ownership stake in the company dropped to just under 70%.

Over the past several years, the government of Portugal has undertaken a vast privatization programme. In 1996, privatizations brought in $3.8 billion, up some 65% from the $2.3 billion recorded for 1995. The major transaction in 1996 was an offering in Portugal Telecom, at Esc 145 billion.

In France, privatization sprang back into life in June 1996 with a secondary offering in AGF. This offering raised over FF 9.7 billion. In Spain, the government continued its wide-ranging privatization efforts through secondary offerings in the banking group Argentaria (Ptas 154 billion), and in oil and gas company Repsol (Ptas 77 billion).

In 1997, a particularly high level of privatization activity was expected in Spain ($11.5 billion), Japan ($8.7 billion) and Australia ($7.1 billion). (OECD, Financial Market Trends, No. 66, March 1997.)

Country breakdown of global amount raised from privatization ($ million)

Source: OECD

Privatization in OECD countries has predominantly been made through public offerings of equity in the capital markets. In fact, during the period under consideration, public offerings were the most important privatization method in every year except 1992. The choice of public offerings is not surprising, as the two main requirements for using this method - a reasonably deep national capital market and relatively little need for restructuring - are normally met in OECD countries. The other main method of privatization is a trade sale to strategic investors wishing to exercise managerial control. This method has been much less common in the OECD area. (OECD, Financial Market Trends, No. 66, March 1997.)

Since 1991, the share of privatization-related public offerings bought by non-residents has declined steadily, while that of residents has increased. Even though international investors continue to play an important role, this would seem to suggest that privatizations are having some success in promoting domestic equity investments, even in countries where such investments traditionally have been relatively limited. Domestic equity markets are developing rapidly in many OECD countries, becoming deeper and more liquid. At the same time, institutional investors in many OECD countries, where bond markets have traditionally played the main role, are slowly becoming more interested in equities.

Turning to privatizations by trade sale, it is not surprising that residents in OECD countries account for the largest share. Notwithstanding the high level of cross-border deals, mergers and acquisitions within a country remain the rule, and there is little reason to believe that privatization is any different. Thus, it is particularly noteworthy that in 1993 and in 1995, privatization-related trade sales to non-residents exceeded those to residents. (OECD, Financial Market Trends, No. 66, March 1997.)

Developing countries

Value of privatization revenues

Between 1988 and 1995, developing-country governments earned more than $132 billion from the sale of state-owned assets. This reflects the transfer of control of over 3800 entities from public to private hands. Revenues from the sale of state-owned enterprises (SOEs) in developing countries has grown from only $2.6 billion in 1988 to over $21 billion in 1995, having peaked at over $26 billion in 1992. Mexico, Argentina, Brazil, Malaysia, Hungary, China and India had the highest developing-country privatization revenues during the period 1988-1995.

The number of developing countries undertaking privatizations has grown continuously, from 14 in 1988 to over 60 in 1995. The majority of privatization revenues have been earned in Latin America (51%), followed by East Asia (21%) and Europe and Central Asia (18%). Relatively little privatization has taken place in the Middle East, North Africa or in Sub-Saharan Africa. While South Asia also experienced only modest amounts of privatization over this period, sales (primarily in Pakistan and India) have been increasing in recent years. (International Finance Corporation (IFC), Trends in Private Investment in Developing Countries)

Although privatization in Africa is still very modest, the pace has increased in recent years and is expected to accelerate even further in the coming years. Through 1996, the cumulative value of sales was $2.8 billion ($362 million prior to 1991, with the remainder occurring in 1992-1996). 1997 sales were predicted to be well over $3 billion, representing an increase of over 100%. In the telecommunications sector, many projects have entered into the privatization process - for example in Congo, Cote d'Ivoire, Gabon, Ghana, Guinea and South Africa. Currently, however, privatization revenues are very unevenly distributed among African countries. Ten countries account for 87% of cumulative sales values. At the end of 1996, the leading countries were South Africa, Ghana and Cote d'Ivoire. In terms of the cumulative sales value of privatization transactions as a percentage of annual GDP, some of the smaller economies figure prominently - such as Mozambizue, Cape Verde, Ghana, Guinea Bissau, and Zambia. Sales proceeds per capita place the same countries on top of the list. (World Bank, Privatization in Africa)

Other relevant articles: Private Sector Expansion in Central Europe

Relation of privatization revenues to FDI

FDI from privatization, as a share of total FDI, has been much more important in Europe and Central Asia than in Latin America. Over the period 1988-1995, some 40% of total FDI in Europe and Central Asia came from privatization. In Hungary, for example, some 63% of all FDI has been made as a result of the privatization programme.

While this figure was around 21% for Latin America as a whole, certain countries within the region are very dependent on their privatization programmes. Over 70% of all FDI in Peru, for example, has come through privatization.

Privatization in Brazil, on the other hand, accounts for only 12% of total FDI. The countries of East and South Asia have been much less dependent on their privatization programmes to attract FDI, with only about 5% and 14% of FDI entering these regions, respectively, as a result of privatization programmes. (IFC, Trends in Private Investment in Developing Countries.)

In 1988-1995, foreign investors accounted for about 43% of total privatization proceeds. Of this, FDI accounted for four-fifths of foreign investment generated from privatization, with the remainder coming from portfolio investment.

FDI from privatization, like overall FDI, has been uneven across regions. Latin America has accounted for the largest share of global FDI from privatization, mainly in Argentina, Peru and Mexico. In Argentina, privatization revenues accounted for $18.4 billion and FDI from privatization $8.7 billion in 1988-1995. The respective figures for Peru are $4.5 billion and $3.2 billion; for Mexico, $27.3 billion and $2.5 billion. However, the proportion of FDI in total privatization revenues is very different in these three countries, with Peru having the largest share.

Countries with the largest privatization revenues differ greatly from each other with regard to the share of FDI in privatization revenues. In Hungary, for example, foreigners have purchased almost all privatized assets. (For country-specific information, see table on privatization revenues, number of privatizations and FDI from privatization)

Sectoral Developments

Overview

Privatization has involved almost all industries and sectors. In the United Kingdom, public housing has been privatized, and in the United States many municipal services have been privatized, such as waste disposal.

The sectoral distribution of privatization varies quite significantly from year to year, and sectors that were important in a given year may all but disappear the following year. The overall sectoral distribution in any particular year depends most critically on which countries dominate in privatization transactions, and where in their privatization programme these countries stand.

Generally, governments have first sold companies that needed the least restructuring and that were already operating in competitive sectors - most notably manufacturing companies and financial institutions. Privatization operations in manufacturing surged in 1993 in OECD countries, because that was when many OECD countries embarked on large-scale privatization programmes. On the other hand, the privatization programme of the UK had already been running for over a decade, and consequently at the beginning of the 1990s it was in a completely different phase than the privatization programmes in other OECD countries.

For non-OECD countries, privatization in manufacturing has been more important than for OECD countries. To some extent, this reflects the fact that state ownership in manufacturing industries was much more widespread in these countries than in the OECD. On the other hand, privatization of financial institutions are much less predominant in non-OECD countries than in the OECD area. With the exception of 1993, the amount raised from the privatization of financial institutions has been fairly modest in non-OECD countries.

At later stages in their privatization programmes, governments have typically begun to dispose of companies that required more restructuring and where a regulatory framework needed to be put in place, such as in telecommunications and public utilities.

Currently, the most dynamic sectors with the greatest privatization activity are energy and telecommunications, which are partly related. Electricity companies are entering telecommunications markets on the strength of their extensive cable and electricity distribution networks and their experience in operating massive, company-wide internal telecommunications networks. (World Bank, The private infrastructure industry - company approaches) The largest privatization to date has been the sale of Japanese Telecom for $73 billion - but in many countries, energy companies have been the largest privatized.

In 1984-1996, there were 547 infrastructure companies privatized, bringing in $357 billion in revenues. In developing countries, infrastructure comprised some 39% of total realized privatization revenues in the period 1982-1995. The privatization of infrastructure, including telecommunications, energy, water and transportation, has played a particularly important role in Latin America and East Asia. On the other hand, in Eastern Europe and Central Asia, industrial enterprises such as steel and chemical concerns have accounted for more than half of all sales. The limited sales in Sub-Saharan Africa have been largely in the petroleum and mining sectors. Of these, the sale of two assets - Nigeria's NNPC oil field and Ghana's Ashanti Goldfields - have accounted for nearly 40% of total African privatization revenues. (IFC, Trends in Private Investment in Developing Countries.)

Much of infrastructure privatization has its origins in the deregulation policies of the United States during the 1970s and in the privatization experiences of Chile, New Zealand, and the United Kingdom during the 1980s. The United States and Western Europe have been the dominant areas in infrastructure privatization over the period 1984-1995. (World Bank, The private infrastructure industry - a global market of US$60 billion a year)

Energy

Energy companies that have been privatized include some of world's largest petroleum companies, based in the industrialized nations. Global giants, such as British Petroleum, British Gas, Elf Aquitaine (France), ENI (Italy), Petro Canada, Repsol (Spain), and TOTAL (France) have all recently undergone transitions from state ownership to at least a significant degree of private ownership. Other large petroleum companies lie in the countries of the former Soviet Union and in Latin America, and have also been moving towards private ownership.

See petroleum privatization in UK, France, Italy, Canada, Spain, Norway, Argentina, Mexico, Venezuela, Brazil, Colombia, Ecuador, Peru, Bolivia, Trinidad, Russia, Albania, Bulgaria, Czech Republic, Slovakia, Hungary, Poland, Romania, China and Vietnam.

Electric power is expected to be the world's fastest-growing source of end-user energy supply over the next two decades. To meet global power projections, it is estimated that over $1 trillion will have to be spent over the next ten years. The electric power industry has undergone a substantial degree of privatization in a number of countries in recent years. Growth in power generation is expected to be particularly high in Asia, with China leading the way.

The privatization of electric utilities continues in both developing and developed countries. Although varying extensively in degree and method, countries as different as India and the United States have exposed their electric power generation industries to greater market forces. Chile led the way with electric utility privatization in the late 1980s, followed by the United Kingdom. Currently, most Latin American countries are privatizing their electric power industries to some extent. Prominent electric power privatization efforts also are currently underway in Australia, Canada, China, Scandinavia, India, Indonesia, Morocco, Pakistan, the Philippines, and Eastern Europe.

See privatization of electric utilities in UK, Finland, Norway and Sweden, France, Italy and Portugal, Hungary, Poland, Russia and the Czech Republic, Australia, India, Pakistan, China, New Zealand, Indonesia, the Philippines and Marocco, Argentina, Bolivia, Chile, Colombia and Peru, Brazil, Mexico and Venezuela, the Dominican Republic and Trinidad.

Privatization has also resulted in the growing convergence of petroleum- and electric power-related activities. This growing interconnection between petroleum companies (particularly those with substantial natural gas production or distribution activities) and electric power generation results from a number of factors. In certain regions, natural gas is becoming the fuel of choice for new electricity generation projects - in part, because of the relative environmental advantage that natural gas has over coal or oil. The much-improved efficiency of gas-fired electricity generation units in recent years has also improved the relative competitiveness of natural gas as a fuel for the generation of electricity. Furthermore, in several countries natural gas deregulation has accompanied the deregulation of electric power. In the aftermath of several prominent deregulatory efforts in the US natural gas market - culminating in the final deregulatory push of the Federal Energy Regulatory Commission (FERC) in 1993 through FERC Omnibus Order 636 - US natural gas pipeline companies have become particularly well-suited to enter newly opened markets in a variety of international regions undergoing a deregulatory and transitional phase. (EIA, Privatization and Globalization of Energy Markets.)

Telecommunications

In many countries, fixed telephone service is still a public-sector monopoly. However, in 1998 the monopolies will, in theory, be swept away in most countries, as agreed within the World Trade Organization (WTO). On 15 February 1997, the WTO successfully concluded nearly three years of extended negotiations on market access for basic telecommunications services (See summary on negotiations and agreement). The markets of the participants accounted for over 91% of global telecommunications revenues in 1995. The timetable for opening markets in early 1998 parallels an earlier agreement by the countries of the European Union to create a single market for telecommunications services.

Global telecommunications revenue in 1995 stood at US $601.9 billion, or 2.1% of global GDP. Revenue from mobile services was estimated at about $82 billion in 1995, or nearly 14% of total telecom revenue. International calling services were estimated at nearly $63 billion, or about 10% of total revenue. The United States, the EU, Japan, Canada and Australia account for 77% of global telecommunications revenues.

Telecom revenue grew by 7% in 1995; this is higher than the annual average growth rate of 5.2% recorded since 1980. In addition, the number of telephone main lines globally increased by about 7% in 1995, following similar performance in 1994. Other measures provide even more dramatic confirmation that telecommunications is a fast-growing sector. (See World Trade Organization (WTO) data on telecommunications markets)

Over the period 1984-1996, telecommunications privatizations accounted for $158.5 billion. By the end of 1996, some 44 public telecommunications operators had been privatized, in some 68 transactions. The privatization process was initiated in the United Kingdom in 1981 when Cable & Wireless was privatized; a second tranche was sold in 1983. A first stake in British Telecom was sold through public offering in 1984. NTT of Japan as well as CTC and ENTEL of Chile followed in the mid-1980s. (International Telecommunications Union (ITU), World Telecommunication Development Report.)

To put telecommunications privatization figures in perspective, since 1984 there have been 547 infrastructure companies privatized, for $357 billion. Thus, while the telecommunication sector accounts for only 8% of all infrastructure companies privatized, in terms of value, it accounts for 44%. It should be noted, nevertheless, that the flotation of NTT ($70.4 billion raised in 1986, 1987 and 1988) and of British Telecom, now BT (some $22 billion raised in 1984, 1991 and 1993) account for 58% of the overall amount. (ITU, World Telecommunication Development Report.)

Telecommunications privatization has concentrated in the Asia-Pacific and Western Europe. The share of FDI in privatizations has grown in recent years (See the Economist, Telecommunications Survey) In addition, FDI patterns in telecommunications are changing. The linguistic factor and the obvious legacy of colonization may still be significant in specific cases, such as Telefonica de Espana or Portugal Telecom, which favour foreign investment in South America or in Lusophone countries. However, former colonial ties are no longer the most important factor influencing foreign investment. Indeed, the former colonies are themselves becoming major foreign investors: Singapore Telecom has invested $2.2 billion in 21 countries, including a cable telephony operator in the United Kingdom, of which it was a former crown colony. (See ITU tables on privatized companies, 1984-1996: privatizations raising less than US$ 1 billion, privatizations raising between US$ 1 billion and US$ 2 billion, privatizations raising between US$ 2 billion and US$ 5 billion, privatizations raising over US$ 5 billion.

Special Economic Zones

Differences between the zones

Free trade zones (FTZs) and export processing zones (EPZs) are sites where foreign or domestic merchandise may enter without a formal customs entry or the payment of customs duties or government excise taxes. EPZs are dedicated to manufacturing for export, whereas FTZs also handle imports. If the final product is exported, no customs duty or excise tax is levied. This applies to both free trade and export processing zones. If the final product is imported into the host country, state, or region, it may receive preferential treatment, depending on the FTZ. In addition to FTZs and EPZs, there are also foreign access zones (FAZs), which are dedicated to encouraging imports, not exports. Host countries, states, and regions offer a variety of incentives, including preferential custom duties, taxation and financing.

The ICFTU defines the export processing zone as follows: "a clearly demarcated industrial zone, which constitutes a free trade enclave outside a country's normal customs and trading system where foreign enterprises produce principally for export and benefit from certain tax and financial incentives." (International Confederation of Free Trade Unions (IFCTU) Behind the Wire: Anti-union repression in the export processing zones)

There are various ways to ensure that there is no misuse of the advantages of these zones. An enclave or fenced zone is monitored by an around-the-clock customs presence. Fenced zones are typical of Latin America and the Caribbean. Non-fenced zones, which allow the enterprises to bypass the normal customs and duty-free import procedures, rely primarily on the firms' self-declaration of input inflows and output outflows. This self-declaration system is used, for example, in Mauritius. Special bonded manufacturing warehouses (BMWs) rely on spot checks of factory inventories by customs officials. Transparent criteria for each inventory check are based on pre-tabulated input-output (physical) coefficients (such as the fabric-garment conversion factor). This method is used, for example, in Bangladesh. (See, World Bank, Free Trade Status for Exporters)

Some data on zones

FTZs and FAZs

There are no global figures available on the number or location of FTZs or FAZs.

As of June 1997, the United States had 225 foreign-trade zones and 359 subzones in 49 states. These zones employed 300,000 people. If the final product is exported from the United States, no US customs duty or excise tax is levied. If, however, the final product is imported into the United States, customs duty and excise taxes are due only at the time of transfer from the foreign-trade zone and formal entry into the US. The duty paid is the lower of that applicable to the product itself or its component parts. Thus, zones provide their users with opportunities to save on customs duties. In addition, zone procedures provide one of the most flexible methods of handling domestic and imported merchandise. (The National Association of Foreign-Trade Zones, http://imex.com/naftz.html)

Exports from US foreign trade zones have increased dramatically since the early 1980s. Exports from facilities operating under FTZ procedures amounted to $16.9 billion. While this is a slight decline over the previous year's $17.4 billion, it does not appear to represent a significant deviation from the long-term upward trend of FTZ exports. A 1994 report showed a 50% increase in exports (from $11.6 to $17.4 billion), which was well above the average annual increase of the past two decades. (See the tables in the Annual Report of the Foreign Trade Zones Board)

As already noted, FAZs are for imports only. In Japan, outward FDI and exports outweigh inward FDI and imports. The government of Japan, operating under the "Law on Extraordinary Measures for the Promotion of Imports and Facilitation of Foreign Direct Investment", enacted in 1992, has established a network of Foreign Access Zones (FAZs) around the country, particularly in regional markets, to attract increased imports and foreign investment. A total of 22 FAZs were operating as of June 1997. Each FAZ concentrates import facilities and related businesses around an international airport or harbour, resulting in a dynamic regional centre for foreign business. Host regions offer a variety of incentives, including preferential taxation, low-interest financing and more, to encourage foreign businesses to locate in their FAZs and resident firms to expand their imports.

EPZs

The WEPZA's (World Export Processing Zone Association) Directory for 1997 includes over 800 export processing zones (EPZs). (http://www.wepza.org/~sth/) According to the ICFTU, "in 1995 there were more than 230 export processing zones, spread across nearly 70 countries, including more than 100 in Latin America and the Caribbean, 64 in Asia and 31 in Africa". ICFTU includes free trade zones to export processing zones, but WEPZA does not.(ICFTU, Behind the Wire: Anti-union repression in the export processing zones)

According to the ICFTU, EPZs are a global phenomenon, but one that is very unevenly spread, in terms of investment and jobs. The industrialized countries only have a few zones, mainly located in poorer or more remote regions: Australia, for example has a "Trade Development Zone" in the Northern Territory (Darwin). In the developing countries, investment in these zones is concentrated in a handful of countries: in 1986, 14 countries - out of a total of 45 - accounted for 94.5 per cent of employment in the zones. This concentration can also be found at the regional level. In Africa, also in 1986, three countries, Egypt, Tunisia and Mauritius, represented 96.5 per cent of employment in the zones. In Latin America, Mexico, Brazil and the Dominican Republic account for 91 per cent of employment between them. (Behind the Wire: Anti-union repression in the export processing zones) These ICFTU figures originate from the ILO publication: Economic and Social Effects of Multinational Enterprises in Export Processing Zones, Geneva 1988, page 10.

The United Nations Industrial Development Organization (UNIDO) had 1992 EPZ employment figures on 14 countries. Figures were missing for 47 countries, although these countries had EPZs. The UNIDO publication Export Processing Zones: Principles and Practice was published in 1995. According to UNIDO, there were 120,000 employees in EPZs in the Dominican Republic and 600 in Cameroon.

In 1990-1991, according to UNIDO, the number of EPZ employees in the Asia-Pacific region was highest in China (2,000,000), Singapore (210,000) and Hong Kong (120,000). In Latin America and the Caribbean, Mexico had the highest number of EPZ employees (487,000), followed by the Dominican Republic. In Africa, Tunisia and Mauritius had the highest number of EPZ employees.

Philippine Ecozones

According to the ILO Working Paper Export Processing Zones in the Philippines (1996), there were four zones in 1994. The value of their exports was nearly $2 billion in 1994. There were 310 registered firms in 1994, and 86,265 employees in April 1995.

Since that Working Paper was published, the situation has changed considerably. According to the Philippine Economic Zone Authority (PEZA), Export Processing Zones are one category of ecozone. There are 19 ecozones, which are divided into a number of categories. Industrial Estates (IEs) are tracts of land developed for industrial use. They have basic infrastructure such as roads, water and sewage systems, pre-built factory buildings, and residential housing for the use of the community. Export Processing Zones (EPZs) are special IEs whose locator companies are mainly export-oriented. EPZ incentives include tax- and duty-free importation of capital equipment, raw materials and spare parts. There are five export processing zones: the Baguio City EPZ, Bataan EPZ, Cavite EPZ, Mactan EPZ, and Mactan EPZ II. There are about 250 registered companies in the EPZs, most of which are involved in the manufacture and export of electronics, garments, rubber products, fabricated metals, plastics, electrical machinery, transport equipment and industrial chemicals. Free Trade Zones are areas near ports of entry, such as seaports and airports. Imported goods may be unloaded, repacked, sorted and manipulated without being subjected to import duties. However, if these goods are moved into a non-free trade zone, they are subject to customs duties. Tourist & Recreational Centres contain establishments that cater to both local and foreign visitors to the ecozones. Such businesses include hotels, resorts, apartments and sports facilities. (See, PEZA's introduction to Ecozones)

Mexican maquiladoras

According to Migration News, over 3000 Mexican maquiladoras employed 743,000 workers at the end of 1995, providing about one in five Mexican manufacturing jobs. The value of the finished products exported from Mexican maquiladoras was over $30 billion in 1995, or 34% of the total value of Mexican exports, second only to oil. In 1994, the US made a net $3.3 billion in new investment in Mexico, including $2.4 billion in manufacturing. About 40% of new 1994 manufacturing investment was in vehicles. (Migration News, Mexican Maquiladoras)

A maquiladora is a Mexican assembly or manufacturing operation that can be subject to up to 100% non-Mexican ownership and management. As long as the imported components brought into Mexico are destined for export, no Mexican import duty is levied on the temporarily imported maquiladora inputs. In lieu of duties, maquiladora operators must post a bond with the Mexican Customs Service to guarantee that components and raw materials are re-exported from Mexico within a six-month period. The maquiladora may bring in as many foreign employees as necessary with the exception of hourly laborers. All hourly employees must be Mexican. Foreign employees must obtain work visas, which usually require a 3-5 day waiting period.

A maquiladora utilizes competitively priced Mexican labour in assembly, processing or other manufacturing operations. It temporarily imports most components parts from the US and other sources. Mexican law also allows these operations to bring in most capital equipment and machinery from abroad. Maquiladora operations are generally labour-intensive cost centres, with most production geared for export from Mexico. Finally, most maquiladoras are located along the Mexican border to the US.

EPZs in Mauritius

As of March 1996, 480 EPZ companies employed some 81,048 persons in Mauritius (a 2.5% drop from 1995 levels).

The number of enterprises and employees rose steeply until the 1990s. In 1991, the number of enterprises started to decline, and a year later also the number of employees.

The value added per worker has increased steadily over the last ten years, but labour costs have also increased more dramatically. (See tables IV and XIV in the Overview of the Export Processing Zones Development Authority)

Mauritius is still an African success story, but the World Bank suggests that productivity is no longer increasing fast enough to keep pace with wages that have been rising as a result of near-full employment, thus eroding the country's competitiveness. Over a span of some 25 years, real growth averaged 6% annually, resulting in nearly a fourfold increase in real per capita income and the elimination of unemployment. Growth was export-led, fuelled by relatively cheap labour and preferential access to markets in Europe and the US for the country's principal exports, sugar and garments. Notwithstanding this success, there are growing challenges to competitiveness and the sustainability of growth. New competitors have emerged in traditional Mauritian labour-intensive exports, and returns on investment in the EPZs declined steadily in the late 1980s and early 1990s. (See, the World Bank analysis: Mauritius: Sustaining the Competitive Edge)

The value of EPZ exports reached Rs 18.3 billion in 1995 (a 10.5% increase over 1994). The estimate for 1996 was Rs 20.5 billion, representing growth of 6.0%, as compared to 5.0% in 1995. The EPZ import bill for 1995 was Rs 10.9 billion. The ratio of net EPZ exports to total EPZ exports worked out to 41% for 1995, and was estimated at 42% for 1996.

France, followed by the US, the UK, Germany and Italy continue to be the main markets for Mauritian EPZ products. In 1995, exports to France were Rs 5.2 billion (28.5% of all exports). Exports to the US (21% of total exports) declined by 8% in 1995, to Rs 3.9 billion from Rs 4.2 billion in 1994. On the other hand, exports to the UK (18.7% of exports) registered a very significant jump of 34% in 1995 (Rs 3.4 billion, compared to Rs 2.5 billion in 1994). Germany and Italy saw their imports of EPZ goods from Mauritius rise in 1995, by 7.7% and 11.8% respectively. Provisional figures for the first half of 1996 indicated substantial increases in exports over the same period in 1995 - a 20% increase in exports to France and 16% to the UK. (See, the Overview of the Export Processing Zones Development Authority)

Some observations on outward processing

Outward processing is the practice of sending abroad materials, components and supplies for processing or assembly, to have them returned with duty charged only on the value added abroad. According to the WEPZA, outward processing was a US $113 billion import business in the US and the European Union in 1995, of which transport equipment manufacture represented $50 billion, electrical and electronics $34 billion, and garments and footwear $14 billion.

A survey conducted by JETRO (the Japan External Trade Organization) points out that outward processing is increasing. Products made offshore by Japanese affiliates and imported into Japan continue to expand.

The major findings of the JETRO survey are as follows:

• Over half of Japanese manufacturers with overseas operations are reverse importing.
• Among companies engaged in reverse importing, overseas bases accounted for 28% of total production in fiscal 1996, up from 25.7% in fiscal 1995.
• Offshore production by subsidiaries accounted for 31.7% of total imports by their Japanese parents.
• The primary merit of reverse importing is cost savings.
• Domestic industries hurt the most by reverse importing, which has the effect of reducing domestic production, are textiles, nonferrous metals, and electric and electronic equipment.
• Reverse importing is expanding steadily, but foreign exchange fluctuations may affect this trend in the short term in most industries. Electronic and precision industries, however, are expected to continue strengthening their reverse importing activities, regardless of foreign exchange fluctuations.

Parent companies are working steadfastly to avoid the negative effects that reverse importing can have on domestic employment.